Property prices soar but 'no danger of bubble'

Low interest rates and the flight to property in a time of economic uncertainty have led to rocketing German property prices, particularly Berlin and Hamburg – but there seems to be little danger of a market bubble.

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Although Germany has traditionally been a country where people rent rather than buy, and there are laws designed to prevent property speculation, the housing market has boomed over the last few years.

The Cologne Institute for Economic Research (IW) said that the average annual price increase of 4.5 percent since 2010 was well above inflation rates.

It examined prices in five large German cities over the last few years, showing a 39 percent increase in Berlin prices between 2003 and 2011 – and a 31 percent increase in Hamburg in the same period. Munich prices have risen by 23 percent in that period, while those in Frankfurt have increased by 14 percent and in Cologne by 10.5 percent.

Munich remains the most expensive German city to buy property, with an average price of €4,200 per square metre. Hamburg comes second at an average of €3,100, then Frankfurt at €2,900. Berlin still lags behind at an average price of €2,200 per square metre.

Yet the institute said in a statement, there was no reason to fear the kind of disastrous property bubble experienced in the US, Ireland and Spain. “Despite extremely low interest rates, there is neither an expansive money-lending tendency, nor a very high rate of purchase and re-sale,” it said.

Rental prices have generally kept pace with purchase prices, the institute said, creating the impression that the increase in price is a consequence of great demand and a sign of the popularity of German cities.

Jörg Krämer, chief economist at Commerzbank said he would not rule out a property bubble, but that the excesses seen elsewhere would take longer to happen in Germany.“The overheating takes longer here than in other countries,” he said.

“Such a bubble would be unlikely here,” said property expert at Deutsche Bank, Jochen Möbert. This was because money was never leant exorbitantly in Germany.

Michael Hüther, director of the IW, said only if huge amounts of foreign money were to pour into the German property market would a bubble be a danger. German banks were much more conservative about lending money to buy property than those in the US or Spain – refusing to do so if the customer has no capital to contribute.

The German tradition of renting rather than buying also insulates the property market from snap decisions, said economist Michael Voigtländer. “In Great Britain the proportion of house ownership is high – there are barely any rental flats,” he said. This means that as soon as interest rates drop, people in the UK and Spain have to buy something while they can, he said.

DPA/The Local/hc